Ukraine approves sale conditions for 61% stake in Donbasenergo

The Ukrainian government has approved the privatization conditions for power GenCo Donbasenergo (DOEN UK) on July 11. Earlier this month the State Property Fund scheduled privatization of Donbasenergo for August 2013.

The most critical rules of the sale are the qualifying conditions for the potential bidder, which should either produce electricity in Ukraine of no more than 15% of Donbasenergo’s production over the last three years (e.g. no less than 1.37 TWh in 2012), or coal mined in Ukraine in the amount of at least 15% of Donbasenergo’s usage over three years (e.g. at least 0.7 mmt in 2012).

Alternatively, a bidder could own at least a 50% stake in each company of an assembled group that would qualify, collectively, for either of the mentioned criteria. On top of that, the qualifying bidding company must not have direct or indirect state ownership of more than 25%.

The starting price for Donbasenergo’s 60.77% stake was set by the government at UAH 641 mln (UAH 44.6/share, or 98% premium to the market price). The state will retain a 25% stake.

Alexander Paraschiy: The Cabinet’s decision is a green light to start preparing the company for a privatization tender. Therefore, we have enough reasons to expect the tender will occur according to the SPF’s schedule. The starting price of the 61% stake in Donbasenergo implies MCap/Capacity of USD 51/kW, which is 2x less than the multiple at which DTEK (DTEKUA) bought Zakhidenergo (ZAEN UK) and Dniproenergo (DNEN UK) in 2012 (USD 105-114/kW).

Only Ukrainian companies are among those who can qualify for a tender: DTEK, Kharkiv CHP-5, Zhdanovska mine, Coal Energy (CLE PW), as well as producers of coking coal, like Metinvest (METINV), Zasiadko Mine and Pokrovske Mine (SHCHZ UK). Among these companies and their owners, only DTEK could have a real interest in purchasing Donbasenergo. Therefore, we see a low probability of a real competition at the privatization tender – the deal price is unlikely to be higher than the defined starting price.

Though, theoretically, new companies could emerge which could qualify for the tender if they are able to acquire assets with the required volume (i.e. aggregate coal output of 0.7 mmt over the last 3 years) before the tender. Kharkiv CHP-5, Coal Energy and Sadovaya Group (SGR PW), theoretically, could become a target of a potential Donbasenergo bidder.